In our last post, we discussed the top societal risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 7^th annual Global Risks report. Chronicling dozens of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing the top three risks from an environmental perspective.

According to the report, the two top risks, which are essentially the same as last year, are:

Rising Greenhouse Gas Emissions and the Climate Change that will Result

Climate change may not seem like a big risk, but it can have drastic consequences on your operations. Not only can it increase the likelihood of (tropical) storms, floods, blizzards, and ice storms, which can destroy your factories, wash away your delivery trucks, trap your workers in the factory for a week, and take down entire power grids, but it can wreak havoc on your operations. For example, if you want to drill for oil in the oil sands, you need the ground partially frozen. If six months are required to extract a year’s worth of oil but by the time the ground freezes there will be less than four months of drilling time, problem. And if the risk of flooding is significantly increased, so are the chances of your supply chain being brought to a grinding halt.

Unprecedented Geophysical Destruction

This is likely to take the form of:

Earthquakes & Volcanic Eruptions

The 9.0 magnitude earthquake in Japan in March of 2011 demonstrated the devastation that earthquakes could have on global supply chains. The earthquake and resulting tsunamis not only damaged or destroyed thousands of homes and hundreds of factories, which resulted in almost 20,000 deaths, but also resulted in the immediate declaration of a state of emergency at a nuclear power plant when dangerous levels of radiation escaped the Fukushima No. 1 (Daiichi) plant. In addition, it triggered the immediate shut down of 15 of Japan’s nuclear power stations and a crisis at the Tokai No. 2 Power station was narrowly averted.

However, this earthquake is nothing compared to what a well placed major volcanic eruption can accomplish. Not only can a major eruption near the edge of a tectonic plate trigger an earthquake, but it could launch enough ash into the air to make air travel through a region impossible for months. The recent volcanic explosions in Iceland in 2011 are nothing compared to some of the eruptions that have happened in the last few thousands years. Not even the eruption of Mount St Helens in 1980 was very big. It only erupted 1 cubic km of lava. The largest eruption, in terms of java discharged, in the last 99 years was Pinatubo in the Philippines in 1991. A whole 10 cubic kms of lava was released. The 1912 eruption of Katmai in Alaska released 12 cubic kms. And this is nothing compared to the 1815 eruption of Tambora in Indonesia that released 100 cubic kms of lava. And students of history are aware of how Mount Vesuvius buried Pompei under 4 to 6 m of ash and pumice. The eruption of Krakatoa in 1883, which was heard across the world, released so much ash into the air that it caused a volcanic winter. Temperatures worldwide dropped an average of 1.2° C for the next 5 years as a result of ash that was ejected 20,000 ft high. If this happened today, air travel would be interrupted for at least six months in the region. The interruptions in air travel as a result of the Icelandic explosions would be minor in comparison.

Flooding

The floods in Thailand last year and the floods in Bangladesh and the Philippines this year are a perfect example of the significant impact that floods can have on global supply chains. Economic losses in 2011 due to the Thailand floods reached 46 Billion by the end of 2011 (Source), more than doubling the insurance losses that were expected to reach 20 Billion (Insurance Insight). The reality is that a single flood can cause so much damage that it could literally bankrupt an operation. The automotive sectors and electronic sectors were impacted the hardest by the Thailand floods — more than 400 Japanese companies in these sectors suspended operations or lowered output as a result of the floods.

And with global warming, which is causing many of the ice flows in the arctic to break up, the risk of flooding is greatly increasing. Many of the worst floods in history were ice-jam floods resulting from “breakup jams” which force ponding upstream and a rapid release of water when the ice dams breach. This is what happened in (April) 1952 on the Missouri River in (Bismarck) North Dakota where an eroding ice dam resulted in flow increasing from about 2,100 m³/s to more than 14,000 m³/s in less than 24 hours. The river rose 5 feet in less than 2 hours and submerged nearly everything south of US Highway 10. Fortunately, this was not a densely populated area, otherwise, instead of 200 houses being destroyed, there would have been 20,000 houses destroyed and likely thousands of deaths. If this happened near your factory, it would be wiped out almost instantaneously.

The World Economic Forum‘s 7^th annual Global Risks report was recently. Again chronicling dozens of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. What’s interesting about this report is how the biggest risks in many of the categories haven’t changed at all since last year. Take Society for instance. While it chronicled seven major risks in this category, the top two dwarf the other five and they are the exact same as last year.

02: Food Security

People need to eat. As a result, they need access to safe, secure sources of staple foods at an affordable price point. If they don’t have access to safe, secure sources of staple foods at an affordable price point, they riot — as we have seen in Tunisia, Algeria, Bangladesh, Mogadishu, India, China, and even the UK and Canada this year. When people riot, property gets destroyed — property that could include your delivery trucks, your goods in your warehouses, and even your production plants. Try ensuring supply with no distribution mechanisms for raw materials, no working production lines, and no warehouses to store anything.

01: Water Security

Not only do people need water, but supply chains need water. First of all, supply chains need energy. Energy production requires water (as per the Water Energy Nexus). For example, in the USA, about 2 US gallons of water evaporates to create one kilowatt hour of energy. Steel, which is a component of many goods, requires 62,000 gallons of water for the production of a single ton. Semi-conductor fabrication plants often require up to 2,000 gallons of water per minute. No water, no goods, no components, and no energy. And if water gets too scarce, so is food. And a vicious downward societal cycle will begin.

It should be obvious by now that while the risks of pandemic, chronic disease, religious fanaticism, migration, and age aren’t going away, they aren’t going to matter much if we don’t have the food and water to sustain ourselves.